Manufacturers In China Should Change Their Sourcing Strategy To Improve Business Competence

Chinese manufacturers are repositioning. They’re willing to invest more in improving their core competencies, like R&D and design capabilities, by using outsourcing providers that have successfully served foreign peer companies in the same industry. They must dedicate all their resources — including internal IT systems and solutions like ERP — to meeting this goal.

We recently published a case study on Tagal, a joint venture of ThyssenKrupp Steel Europe and Angang Steel in China. The company was finding it difficult to face up to new business challenges; not only was its infrastructure aging, but its original outsourcing services agreement was constraining business development.

To solve these problems, Tagal changed its sourcing strategy and successfully migrated its ERP system to an Itanium x86 platform to accelerate business processes. The resulting ERP efficiencies enabled employees to process orders and reports twice as fast as before. This has improved Tagal’s relationships with its customers, which are some of the world’s largest automakers. Tagal also reduced its total cost of ownership by 20% in the first nine months alone, primarily due to the simplified sourcing strategy.

How did Tagal achieve these tangible outcomes? It redesigned its service contract and employed three key principles when re-evaluating vendors:

  • Modifying sourcing governance. Tagal drew on lessons that it learned from 10 years of outsourcing. Its new service provider contract contains more penalty terms; for instance, the provider now must refund the outsourcing fee in any month in which it does not fix two system errors within an agreed time period.
  • Ensuring that the service contract can evolve. Tagal redesigned the service contract to support innovation and new technology migrations. For instance, the new contract permits Tagal to initiate new projects and request proposals not only from the current vendor, but also from third-party providers with proven expertise in a selected area, such as mobile.
  • Carefully identifying vendors for infrastructure migration. Tagal looked closely at each potential vendor’s RISC migration capability starting from the RFP stage. Vendors selecting service providers can learn from Tagal’s approach to evaluate vendors’ willingness to invest in upgrading their own capabilities.

Manufacturers all face different challenges around business processes, innovation, and client experience management, but they’re all keen to remain competent in their subindustry. Do you have issues with the sourcing vendors you currently work with? I’d love to hear your perspective on how to keep improving your sourcing strategy.